Here is the full transcript of financial advisor Shannon Ryan’s talk titled “Confronting Your Financial Scar Tissue” at TEDxManhattanBeach 2022 conference.
Listen to the audio version here:
TRANSCRIPT:
The Impact of Financial Scar Tissue
As a certified financial planner, I have had the front row seat to the financial lives of hundreds of individuals and families. What I have learned is that we all carry financial trauma from our past. I call it financial scar tissue. And it impacts our decisions every day.
In our bodies, scar tissue remains long after a wound has healed. And the same is true for financial wounds. What are financial wounds? Well, they come in a lot of different forms.
It could be remembering your parents arguing over bills, losing your job, a divorce, experiencing a bankruptcy, living through a recession, being hungry, not having the cool clothes or the cool shoes to fit in, or just wanting something or an experience so badly but not having the resources for it. These invisible wounds define our many thoughts.
And then they create behavior patterns in our lives that actually stop us from achieving our financial goals and, more importantly, financial satisfaction. True financial success comes when we can first identify what has caused this financial scar tissue and then understand how it is impacting our daily recurring financial decisions.
David’s Story
Early in my career, I did a financial planning meeting with a man named David. He was 32 at the time. And when he came into my office, he said that his number one goal was retirement planning. And then he told me why.
His parents, they were retired, living solely off of Social Security and, frankly, having a really tough time making ends meet. He said that they had once dreamt of retirement travel, but today watched news and Netflix and just stayed home. And in David’s words, “waiting to die.” David wanted a different life for himself, but he knew he’d have to start early.
And he’d done a good job. As I went through all of his paperwork, he had a cash reserve, he had paid off all debt, and he had $60,000 in his 401K. We went through a planning process, created a cash flow plan with an eye towards retirement. About six months after that initial planning meeting, I gave David a call.
“David, it’s Shannon. How is the planning going?” Before he answered, there was a long, unsettling silence on the other end. “Hey, Shannon. I bought a car.” Huh. I thought to myself, gosh, when we did the planning, he wanted a new car, but his car was running well. And he said that he was going to save money for the next car, but he bought a car.
“Okay. Great, David. How did you finance it?” “I used my 401K.”
My heart sank. And then I proceeded to ask him how much he had actually taken. He had withdrawn the entire $60,000 from the 401K, unbeknownst to me. After he and I met, he had actually taken his financial plan to his parents.
He was excited. His parents were clear. “You are too young to be worrying about retirement. Enjoy life. Live a little bit.” It did not help that his friends weren’t saving for retirement. In fact, they were accumulating debt. David’s peers and his parents had a direct impact on how David thought about saving and spending money.
So what? He’s 32. What did this really cost David? Well, there was really two costs. There was the initial cost. David took $60,000 out of his 401K. He needed to pay state and federal taxes. In his state, it was 22%.
Because he was under 59.5, he also needed to pay a penalty of 10%. David owed 32%, or $19,200 on that withdrawal. He cleaned out his cash reserve because he hadn’t prepared for that cost. However, that was just the immediate cost.
The long-term cost was his retirement. When he came into my office, we did a retirement projection. In that projection, we made some assumptions. The first one was he was saving $200 a month pre-tax.
He had $60,000 in his 401K, earning about 7%, and Florida was matching. We took it out to age 65. He would have had $1.2 million if he continued on that same path. After he purchased the car, he came back to the office and said, “No, really, retirement is so important to me.”
I said, “Okay, no problem, let’s do a reprojection.” He was still willing to save the $200 a month pre-tax, but now he had zero in his 401K. He was starting fresh. Same projections, same assumptions, 65, $623,000.
That is a $577,000 difference. That is an expensive car. Financial scar tissue is how a young professional who knows exactly what he wants sabotages his own financial goals. What we say about money, first to ourselves, and then to each other, it matters.
Joe and Wendy’s Story
Then there are my clients, Joe and Wendy. They are retired. They have saved well to have a very comfortable retirement income. However, they cannot bring themselves to spend money.
They are always waiting for something to compromise their financial position. Joe and Wendy have grandkids on the East Coast, and they so badly want to buy plane tickets to fly from California to the East Coast to visit them, but they won’t buy the tickets. Would it surprise you to learn that Joe grew up in a family where his parents lost everything in the Great Depression, and the family was always preparing for the next financial disaster? As I was getting ready for TED, I would write what I was going to say, and I’d come home at night and I’d read it to my husband, Chris.
One evening, as I read my opening to him, Chris became a little teary. Of course, my first thought was, “Oh boy, this draft is really bad,” but I soon realized that wasn’t the case. Earlier that day at work, Chris had sent an email, and right when he went to send the email, he thought, “Oh man, that was too curt,” and he started a negative thought loop in his head.